After Tax 401k to Roth IRA

Submitted by Ann Minnium on Tue, 2019-03-05 15:41

Hello, Client is considering making additional after-tax 401k contributions to 401k. If she then leaves the company and converts after-tax amounts to Roth will she still be able to withdraw the contributions tax and penalty free anytime as she would with a contributory Roth IRA?

Thank you!



Submitted by Alan - IRA critic on Tue, 2019-03-05 23:13

  • Client generally should roll the after tax contributions to her Roth IRA periodically while still working so that these dollars can get into the Roth IRA sooner and produce Roth earnings. Most plans allow such distributions, some more frequently that others.  If done often enough the gains on these after tax contributions will be small enough to roll into the Roth along with the contributions. Any gains will be taxable.
  • After separation the contributions only can be rolled to a Roth IRA with the gains going to a TIRA along with the rest of the plan. However, if also doing a regular back door Roth, any pre tax IRA balance will result in the conversions of back door Roth contributions being mostly taxable.
  • Once in the Roth IRA, non taxable Roth rollovers of the after tax contribution balance can be distributed anytime without tax or penalty. If gains are rolled into the Roth IRA, the gains will be taxed, and if such gains are distributed within 5 years, there is a 10% penalty on the gains (unless client has reached 59.5).

Submitted by Ann Minnium on Wed, 2019-03-06 13:13

Thank you!

Submitted by Juliet Pereira on Mon, 2019-04-29 23:43

If client is 45 and contributed after tax money to the 401k will he have the 10 percent penalty to withdraw early from the 401k plan? What he wants to do is the Mega back door IRA. HE wants to move the after tax contributions to a Roth IRA and the after tax earnings to a Traditional IRA.The earns are low in a money market.

Submitted by Alan - IRA critic on Mon, 2019-04-29 23:56

  • The 10% penalty will not apply for 3 possible reasons. It does not apply to qualified rollover contributions (to a Roth account), it does not apply to rollovers to a pre tax account, and it does not apply to distributions of after tax amounts.
  • If the earnings are small it is generally preferable to roll them over to the Roth IRA along with the after tax contributions even though they will be taxed. This is a simpler combined rollover and avoids the risks of the IRA custodian applying the incorrect amounts to the two IRA types. It also eliminates adding more pre tax IRA dollars which can interfere with a normal back door Roth conversion for the current or any future years. It also eliminates the issues some tax programs have with entering a single 1099R into the tax program when the proceeds are being sent to two different IRA types. 

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